“The conflict in the Red Sea will lead to higher prices in Russia”

The possible cessation of transportation through the Suez Canal due to the worsening situation in the Red Sea threatens to complicate international maritime logistics. Houthi missile attacks on commercial ships traveling along this route risk causing insurance and cargo shipping costs to skyrocket. Consumers around the world will also feel the financial hit, as the imported goods they need will inevitably become more expensive. Russia will not be an exception: prices for tea, coffee and household appliances promise to soar by 10-15%. The solution may be the development of alternative transport routes, for example, through the Northern Sea Route, where there is not a single hot spot.

“A new threat to world trade” is what the Spanish insurance company Credito y Caucion calls the current crisis in the Red Sea, which estimates the increase in costs for sea freight along this route at 300%. Shipowners have to choose longer and more expensive delivery routes to avoid conflict zones, which increases logistics and other related costs. Transport problems caused by attacks by Yemen’s Houthis are causing delays in the arrival of ships at their destinations: from the Asia-Pacific region to Europe and back. Since about 30% of all global container traffic passes through the Red Sea, the escalation of hostilities, according to the Spanish insurer, threatens to result in a reduction in the capacity of international shipping routes by about 20%.

Other major players in the global market are signaling similar risks. Delivery problems forced electric car manufacturer Tesla to stop work at the German “gigafactory” Berlin-Brandenburg due to a shortage of components. Swedish Volvo also announced the closure of several Belgian factories, and the three largest British retailers – Tesco, Marks & Spencer and Next – warned of an inevitable rise in prices for supplied goods.

If the situation does not change by April, then the largest industrial holdings, as European experts warn, will have to adjust their profit forecasts. As a result, stock exchange quotations of their securities will sharply decrease, capitalization will fall, and the cost of loans will increase to maximum levels.

However, insurers are clearly disingenuous when talking about their own financial losses. After all, they now charge higher fees for their services: participants in the Old World market say that in some cases the cost of individual security policies has jumped almost by an order of magnitude. Transport companies, including those from the United States, Germany, Denmark and Japan, also require additional premiums for transporting goods along unsafe routes.

“Sea transportation has always been considered, although the slowest, but the most cost-effective and safe way to transport goods from one country to another,” says Alexander Shneiderman, head of the sales and customer support department at Alfa-Forex. However, events in recent years indicate that risks are constantly emerging. “Notable cases: the six-day blockage of the Suez Canal in 2021 or the periodic sinking of cargo ships, for example, the container ship TSS Pearl from the UAE in October 2022. You can also remember the Somali pirates. Houthi attacks are a new risk factor. After the first shock, companies will be forced to temporarily redirect transit flows,” the expert believes.

According to Freedom Finance Global analyst Vladimir Chernov, delivering cargo from Asia to Europe via an alternative route, bypassing Africa through the Cape of Good Hope, can actually triple the transfer price compared to the “well-trodden route” through the Suez Canal. Taking into account the increase in costs for insurance, fuel and cash payments to the crew due to the extension of the voyage period by 3-4 weeks, delivery rates for one 40-foot container (maximum load – 30 tons) will increase from $2 thousand to $6.6 thousand.

“Some hotheads believe that due to the conflict in the Red Sea, global GDP will lose up to 10% in 2024,” says BitRiver communications director and economist Andrei Loboda. “True, such a situation will be realized only if the confrontation between the parties drags on and develops into a full-fledged war.”

At the same time, according to Artem Tuzov, director of the corporate finance department at IVA Partners, the projected losses in international trade are greatly exaggerated. “The Houthis attack ships selectively. This is a political, not an economic action. Problems arise only for ships associated with Israel and the United States. Transport routes outside the Red Sea remain open,” the expert says. A complete stop in supplies through the Suez Canal will, of course, lead to an increase in logistics costs, but not at a dramatic level. There are more modest estimates stating that the increase in transportation costs will not exceed 20%. For companies delivering goods by sea, the upcoming losses are likely to be temporary and are unlikely to be insurmountable.

The question arises: how does this whole situation affect Russian foreign economic interests? As Chernov says, on the one hand, the escalation of geopolitical tensions in the Middle East and the lengthening of logistics foreign trade routes partially play into Russia’s hands, as world oil prices increase. On the other hand, international companies using supply channels along the Red Sea will begin to offset the increase in logistics costs by increasing prices for end customers. For Russia, imported goods may rise in price by 10-15%. Mainly, the negative cost trend promises to affect tea (the main supplies come from India, Sri Lanka and Kenya) and coffee (in addition to Brazil, Vietnam, Indonesia and Uganda supply our country with beans for making the “drink of vivacity”), as well as electronics and household appliances. technique.

Meanwhile, as Andrei Loboda reminds, supplies of imported goods to Russia are mainly not carried out through the Suez Canal: goods from China are delivered through the Far East and the Northern Sea Route, and from Turkey through the Black Sea. The conflict in the Red Sea, in his opinion, will mainly affect Russia’s imports of goods from Egypt and Israel, but they can, at least temporarily, be replaced with analogues from neighboring countries or from Turkey.

“Russia is developing the Northern Sea Route and is only benefiting from the aggravation of the situation with the Houthis, since this route is becoming a reasonable alternative for cargo transportation for ships from China. Domestic state companies will most likely insure travel along our northern sea route. This will provide additional income to the national budget,” Tuzov is sure. “There is not a single hot spot on this route, so it is quite possible that China will redirect today’s export flows to it.”